Retirement Planning – Part 2

Investing Strategies

Why do we want to invest our money in the Stock Market (Wall Street).  The answer is simple: over a long period of time the stock market will appreciate more than just about any other type of investment you can think of. Generally speaking the stock market includes stocks (equities), bonds (fixed income), commodities (gold, pork bellies, currencies), real estate (mortgages, REITs) and so much more.  If it sounds complicated it’s because it is!  I will try to help you through all of that.

Let’s say you don’t know much about the stock market or have well founded fears about losing your money.  What’s the alternative?  Your main options are savings accounts, certificates of deposit (CDs) or government savings bonds.  With those, if you’re fortunate, you’ll get a return of about 1%.  Unfortunately for you the current rate of inflation is about 2%.  Putting your money in those instruments is a losing proposition.  You really have little choice but to invest in the stock market.

Mutual Funds

Who hasn’t invested in mutual funds?  I think just about everyone I know had some money in Fidelity’s Magellan Fund at one point; I certainly did.  Common wisdom says that if you have less than a million dollars you should buy mutual funds.  They’re a cheap and easy way to get a professionally managed, diversified portfolio.  The mutual fund industry has done a lot to encourage just that kind of thinking.  As always, the devil is in the details.

If you invest in mutual funds you probably know about ‘A’ and ‘C’ shares.  With ‘A’ shares you pay a percentage of the amount you invest right up front in the form of a fee (typically between 3% and 5%).  ‘C’ shares have no up front fee.  What you may not know is that there is an ongoing expense that you pay for this fund.  You pay a higher expense for ‘C’ shares but there is still a substantial fee for ‘A’ shares.  This expense never goes away; you pay it year after year after year.  There is another even lesser known fee called the 12B-1.  This fee is usually a much smaller amount but you will have to pay it year after year as well.  I like to call small, hidden charges like that, “graft and corruption”.

Ongoing fees for ‘A’ shares are typically in the 1% range.  For ‘C’ shares they are typically in the 1.75% range.  12B-1 fees are less than 0.25%.  Note: For many 401K accounts and high net worth individuals there are often (but not always) ‘K’ or ‘X’ class shares that have much lower expenses.

I have created a simple model (click here) that shows if you invested $10,000 for 20 years and accounted for all of the fees and expenses you would have the following…

  • C-Shares: $25,834.32 (an increase of 258%)
  • A-Shares: $28,886.10 (an increase of 289%)
  • No Expenses: $38,696.84(an increase of 387%)

Note: When considering performance of any investment you should always look at the percentages.  Using dollars amounts for comparison is often misleading.

Because we took 4% right off of the top of the A shares the principle amount we started with was smaller but because the expenses were also smaller the amount grew much faster.  This illustration shows that A shares will outperform C shares if the investment is kept for at least five years.  Even after 20 years the difference between the two is significant but not huge.  Those expenses really weigh on the portfolio’s performance.

The illustration with no expenses outperformed the better performing A shares by almost 100% – a very substantial margin.  Yeah, but is it possible to pay nothing for your investments?  Of course not, but I can show you a way to pay only 0.03% (that’s not three cents on the dollar, that’s three hundredths of a cent on the dollar).  That’s about as close to nothing as you’re going to get.

Next up, let’s talk about financial advisory services.

(Remember: I am not a professional financial planner.  This article is meant only for illustrative purposes.  You should check with your own financial advisor before embarking on any retirement plan.)

The Last Few Days

You may not have heard about our antics for the past few days but that is because we’ve been VERY busy.  Here’s a short version of where we’ve been and what we’ve done…

Tuesday

The day started in Trastevere.  We visited the  Villa Farnesina.  It’s a grand house that was originally built by Augustino Chigi around 1506 as a summer home.  The house is highly decorated with frescos – many of them done by Raphael.  The house is surrounded by a beautiful garden containing many varieties of fruit trees.

(In Italy you spend most of your days staring at ceilings)

After that we started walking upriver with no particular goal in mind.  We passed The Vatican, Castel St Angelo, The Bridge of Angels and The Supreme Court Building.

           (The Supreme Court Building)

Empty stomachs and tired feet became the priority so we decided to cross the river and sit down to some lunch.  We ordered pizza.  In Italy, pizza resembles a loaf of bread that has been flattened and stretched.  It rarely has red sauce on it.  You order it by weight and they cut it to size with plain old scissors (yes, the kind that’s in your desk right now).  We had prosciutto, ham and sausage on ours; it was delicious!

After lunch we proceed to the Basilica of St Ambrose and St Charles.  The major relic was St Charles’ heart.  It was encased in a glass heart for all to see.

We continued walking rather aimlessly until we found, you guessed it, an interesting looking gelato shop.  We shared a cup of milk chocolate and amareno (cherry).  We ate it is we walked.  By the time we finished eating it we were in the Piazza del Popolo.

On our previous trip to Italy we visited Piazza del Popolo briefly in the early morning.  We were there to meet the tour bus to Pompei; we never had a chance to look around at all.  This time we took our time and explored every nook and cranny.  We also visited the Da Vinci museum there.  They had reproductions of all of his inventions.  It was mildly interesting.  In case you ever go there you should know that the museum doesn’t have a restroom – they direct you to the nearby Burger King.  They will let you come back if you show your ticket.

After our visit to the museum, we climbed many, Many, MANY steps to the Terrazza del Pincio, where there was a lovely view of the city.  This eventually led to the Piazza Bucarest and beyond that the top of the Spanish Steps.

Why are they called the Spanish Steps?  We couldn’t remember so we looked it up (again).  The steps connect to the Piazza di Spagna, which was considered to be Spanish territory at one time (the Spanish embassy was there).  The name has nothing to do with the steps themselves.

As we were walking out of the square we stumbled onto one of our favorite gelato places from last summer: Pompi.  They have the best fondante around (dark chocolate).  They also have several  “milk free” (no lactose) flavors.  They do not, however, take credit cards. 😥

According to our iPhones we walked 9.2 miles and 16 flights of stairs that day.

Since this post is already longer than we intended stay tuned for Wednesday and Thursday; we did a lot on those days, too…

 

Retirement Planning – Part 1

How were we able to retire at a relatively early age and still be able to afford to travel full time?  Many people have asked us that very question.  I’m going to do my best to tell you how I think about that subject and convey some of the techniques that we used to get us where we are. Don’t think that you’ll be able to put your head in the sand just because you contribute to your 401K.  Retirement planning means creating a multifaceted roadmap that includes budgeting, savings (pre and post tax), investment strategies and goal planning.

Will the plan be static: No.  Will real life get in the way and cause you to make changes: Yes.  Will this be a frustrating process: Most likely.  What’s most important is to keep one eye on your goals and the rest will work itself out.

Before we can discuss how the pieces all fit together to make an integrated plan we should make sure we fully understand the components of the plan.  Let’s start with retirement accounts; that’s an easy concept to get our heads around.

Retirement Accounts

First off, and I’m sure you’ve heard this more than once before, you should always max out your retirement accounts.  I don’t care how tight your budget is, if you neglect your retirement accounts you are neglecting your future.  You didn’t think you were going to live comfortably only on Social Security did you?  In most cases, with the exception of the ROTH IRA, the monies saved are all “pre-tax”.  What exactly does this mean?

Let me show you a simple example: let’s assume that you’re in the 25% tax bracket and that your gross income on your federal tax form is about $90,000.  That means you’re paying about $22,500 in taxes. Ouch!  If you had put the maximum of $18,000 into your 401K your gross income falls to $72,000 and your tax bill would be $18,000.  That’s a savings of $4,500; that means that you just received a government subsidy – and you thought that those were only for the poor!  In fact that $18,000 only cost you $13,500.  Looked at another way: your retirement account just had a 20% sale!  But, like the infomercial you’re so tired of, it just keeps getting better and better.  Your investments on that money will grow free of interest, dividends and capital gains.

Didn’t think it could get any better than that? You were wrong!  If you’re filing jointly each person can contribute up to $18,000 to their 401K: this translates into a new gross income of $54,000 and a new tax bill of just $13,500.  That’s a total tax savings of $9,000, or a 40% reduction in your original tax bill.  I’ll say that again, you just saved 40% on your taxes!!!

Of course $18,000/$36,000 is a lot of money to sock away each year but who deserves it more than you?  Think of it this way: would you rather pay that money to the government or would you rather pay it to yourself?  Enough said.

Also, many people work at companies that match a percentage of their 401K contributions up to a certain maximum (typically 3%).  This is free money; it’s almost like robbing a bank, but legal.  In order to get this free money you’ll have to contribute to your 401K.  You won’t be sorry.

So, you’ve sacrificed and maxed our your retirement savings.  Think that everything is going to be peaches and cream in your retirement?  Probably not.  There’s a lot more hard work ahead.

(I am not a professional financial planner.  This article is meant only for illustrative purposes.  You should check with your own financial advisor before embarking on any retirement plan.)

Mystery Picture Of The Day (07/11/2017)

Starting today we are introducing a new feature: Mystery Picture of the Day!  Each day we will post a picture from our adventures and ask our local followers to guess what it is. The first few will be easy but expect them to get progressively harder.  We’ll be able to tell if you used picture search engines 😋

Monday in Trastevere

The afternoon weather was calling for rain (it is the rainy season in Rome now) but the morning was beautiful and clear so we decided to explore locally.  The only parts of Trastevere we had seen were the parts near the apartment and along the Tiber River so yesterday we did some exploring.  This meant we were in for some hill climbing.

Trastevere is on the “wrong” side of the Tiber so its hills are not considered to be part of the seven; only the hills that were part of the ancient city of Rome can be counted.  Even so, the hill in Trastevere would be considered the second highest hill in the city.

Not surprisingly the wealthy gravitated to the heights so that their large homes and palazzos had magnificent views of the area.  Sadly most of the large homes are now either part of university campuses or have been divided into multi-family homes.  The views from the top are quite magnificent.

For the majority of the climb you have your choice of long, winding streets or beautifully landscaped stairs with views of the valley; guess which one we chose?  On top we found some large public parks (apparently ideal for dog walking) and fountains.

(This will give you some idea of the climb and the view at the top)

This fountain, in the middle of what is now a residential area, was undoubtedly a terminus for one of the seven aqueducts that came into the ancient city.  The famous Trevi Fountain is another example.

(A large fountain at the top of the hill in Trastevere – likely an aqueduct terminus)

For all you fountain lovers here’s another, smaller one that can be found just blocks from our apartment.  You can see it at the end of one of the longer streets that lead to the base of the hill.

(Beautiful fountains can be found everywhere)

All of the pictures I have posted so far have come from my iPhone.  I hate iPhone photos.  They have lousy resolution, poor color saturation and lack fine details. Starting today I am going to carry my camera.  You should see a vast improvement in the quality of the photos from now on.

Baggage Update

After I submitted my expenses I received an email from British Airways providing me with a case number.  The email also included the following statement.

“We currently have high volumes of incoming mail, so would ask you not to chase a response.  We’ll be in contact as soon as possible.”

I think they would lighten their load tremendously if they’d stop loosing peoples luggage and provide some semblance of customer service.  Aren’t airlines considered to be a service industry.  Enough said.

 

Baggage Update

I guess I’ve kept you in suspense long enough.  My bag did arrive – and within the stated time period.  The bag itself was not damaged and the contents were all intact.  So far, so good.

Phase II.  I submitted the receipts.  They have an online system where you can scan and upload them along with the report on the purchased items.  Of course there were a few twists.

  1. They will credit my bank directly.  The receipts are all in EUR; my bank only takes USD.  I provided them the receipts and a copy of my credit card statement so they can see the charges in USD as well.  Let’s just hope currency conversions aren’t too far beyond their capabilities.
  2. I took pictures of the receipts on my phone.  Each picture was about eight megabytes in size.  Their website allows a maximum size on the uploaded files of only two megabytes.  I made the file sizes smaller to comply but at that resolution the receipts are hardly readable.  Never a dull day.

Watch this space for updates; you never can tell what hell they’ll put me through next 😋

Out and About Again

Today was a busy day.  We had breakfast in the apartment, “stand up” coffee (for Deborah) at a nearby salumeria, did some grocery shopping, watched four workman fix  the lock on our front door, and then were off to re-visit some sights from our last time here in Rome.

Our first stop was The Pantheon.  I have loved this place since I first learned of it many years ago. The idea that this building has survived intact and (in some ways) unchanged for 2,000 years astounds me.  The interior is in fantastic condition and the Oculus is breathtaking.  When we first went there last year Deborah didn’t believe me when I told her that the top had been open for over 20 centuries; she insisted that there must be a glass covering.  Right on cue a bird flew through the opening, circled the interior and landed near the bottom of the dome.  We had a good laugh!  I wish I could find some depiction of what the interior must have looked like in ancient Roman times.

Our second stop was Piazza Navona.  Like The Pantheon this square was the scene of some excitement in Dan Brown’s, “Angels and Daemons”.  We ate pizza while sitting in a cafe overlooking the fountains and listening to a guitar player entertain the crowd.  Last summer one of the stores had a huge stuffed animal in the form of a three headed dragon in the window.  We went by to see if it was still there.  Sadly, it wasn’t.

Next we visited the Trevi Fountain.  I had heard that there was a drought in Rome and that all of the fountains had been turned off.  I guess the drought is over because all of the fountains were flowing with gusto.  After eating gelato at two different places we were off to see the Spanish Steps.

Last summer the steps were closed because of repairs.  This time we were able to see them in all their glory.  It turns out that the steps are a popular place to sit and pass some time.  I don’t know why that surprised me.  I took the liberty of climbing all the way to the top and down again.  After two gelatos I felt I needed the exercise.

(The Spanish Steps – a good place to sit)

Now you get to hear the really big news.  As we were walking back from the Spanish Steps my phone rang: it was British Airways.  My bag is expected to be delivered to the apartment this afternoon between 4:00 pm and 6:00 pm.  Our immediate thoughts ran the gamut of…

  1. Hopefully they deliver the right bag.
  2. All of my stuff better be there.
  3. Will they be able to find the apartment?
  4. I’m taking bets on how late they’ll be.
  5. I hope they won’t expect kudos from me.
  6. How long do you think it will take to get reimbursed for the things I purchased in the meantime.

Let’s just say they’ve given us reason to have low expectations

Trastevere

Our apartment is in a neighborhood of Rome called  Trastevere (tras-TEV-e-rey).  It sits on the West side of the Tiber River just south of Vatican City. The name literally means, “beyond the Tiber”; before the Roman period the area was inhabited by the Etruscans.

It is a charming neighborhood, with a labyrinth of narrow, winding cobblestone streets that lead to wonderfully inexpensive restaurants and has a character all its own.  Our apartment at Vicolo della Torre 13 (Alley of the Tower) resides on a tiny dead-end street along with with a handful of ancient looking homes.  It’s a stones throw from the main street, Viale di Trastevere, and a one minute walk to the Tiber River.  The closest Tiber River crossing is the “Ponte Garibaldi”, which leads you almost directly to the door of the church of Santa Maria in the Cosmedin, which contains the Bocca della Verità (Mouth of Truth) that was featured prominently in movies such as “Roman Holiday” and “Only You”.   We can walk just about anywhere you can think of in less than 20 minutes.  Location, location, location!

Deborah standing in front of our apartment
Our “Alley”

One of the most famous structures in all Rome is located just a stone’s throw from our apartment.  It is the church of Santa Maria in Trastevere. It is one of the oldest churches in Rome whose beginnings date back to the 340s AD.  We visited it yesterday and it was impressive.  Of course it has been renovated and rebuilt many times over the years; some of the oldest structures/artwork seen date from the 12th century.  The church also contains many famous burials as well as two holy relics: the head of Saint Apollonia and a portion of the “Holy Sponge”.

Today we’re planning to visit the Pantheon and the Trevi fountain.  Translation: we’re going back to one of our favorite gelato places!

Lastly the luggage situation: haven’t heard a word from British Air.  I purchased razors, vitamins and such this morning.  I am keeping all of the receipts.

Our First Full Day In Rome

The person we rented the apartment from wrote a lovely guide to help us find services in the area.  She recommended that we use Conad as our local supermarket.  Wanting some food in the house we walked down Viale di Trastevere to where Google said we should find it and all we saw was a clothing store.  A check of the map indicated that we were in the right place.  Perplexed, we walked up and down the street for a few blocks in both directions thinking either we missed it or it was a little further.  No joy.  Just when we had decided that the grocery had closed and been replaced by a clothing store we noticed a small sign inside the clothing store that said, “Conad”.  Surprisingly to us the grocery turned out to be in the basement of the clothing store.  Who figured.

(Our neighborhood grocery store)

In the afternoon we walked the streets of Rome going wherever the meandering streets took us. Uncharacteristically for us we were still at it after dark.  I guess it’s easier to stay out late when you no longer have to get up at the crack of dawn for work.

(Tiber River bridge with St. Peter’s in the background)

I chased British Air all morning for news of my luggage.  “It’s on the next plane” seems to be their standard answer to just about any question.  Once again I heard how it had been found in Las Vegas and was supposed to be sent to Rome via London.  No one had any idea of where it was or whether it had even left Las Vegas, but I should rest assured that the minute it arrived in Rome I would be notified.  While we were out I bought some toiletries and two days worth of clothing; I will be sending the bills to British Air.